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DECISION PHASES IN A SUPPLY CHAIN

Successful supply chain management requires many


decisions relating to the flow of information, product, and
funds. Each decision should be made to raise the supply
chain surplus. These decisions fall into three categories or
phases, depending on the frequency of each decision and
the time frame during which a decision phase has an
impact. As a result, each category of decisions must
consider uncertainty over the decision
horizon.
1. Supply Chain Strategy or Design: During this phase,
given the marketing and pricing plans for a product, a
company decides how to structure the supply chain over the
next several years. It decides what the chain's configuration
will be, how resources will be allocated, and what
processes each stage will perform. Strategic decisions made
by companies include whether to outsource or perform a
supply chain function in-house,
the location and capacities of production and warehousing
facilities, the products to be manufactured or stored at
various locations, the modes of transportation to be made
available along different shipping legs, and the type of
information system to be utilized. A firm must ensure that
the supply chain configuration supports its strategic
objectives and increases the supply chain surplus during
this phase. Cisco's decisions regarding its choice of supply
sources for components, contract manufacturers for
manufacturing, and the location and capacity of its
warehouses, are all supply chain design or strategic
decisions. Supply chain design decisions are typically made
for the long term (a matter of years) and are very expensive
to alter on short notice.
Consequently, when companies make these decisions, they
must take into account uncertainty in anticipated market
conditions over the next few years.

2. Supply Chain Planning: For decisions made during
this phase, the time frame considered is a quarter to a year.
Therefore, the supply chain's configuration determined in
the strategic phase is fixed. This configuration establishes
constraints within which planning must be done. The goal
of planning is to maximize the supply chain surplus that
can be generated over the planning horizon given the
constraints established during
the strategic or design phase. Companies start the planning
phase with a forecast for the coming year (or a comparable
time frame) of demand in different markets. Planning
includes making decisions regarding which markets will be
supplied from which locations, the subcontracting of
manufacturing, the inventory policies to be followed, and
the timing and size of marketing and price promotions.
Dell's decisions=regarding
markets supplied by a production facility and target
production quantities at each location are classified as
planning decisions. Planning establishes parameters within
which a supply chain will function over a specified period
of time. In the planning phase, companies must include
uncertainty in demand, exchange rates, and competition
over this time horizon in their decisions. Given a shorter
time frame and better forecasts than the design phase,
companies in the planning phase try to incorporate any
flexibility built into the supply chain in the design phase
and exploit it to optimize performance. As a result of the
planning phase, companies define a set of operating
policies that govern short-term operations.

3. Supply Chain Operation: The time horizon here is
weekly or daily, and during this phase companies make
decisions regarding individual customer orders. At the
operational level, supply chain configuration is considered
fixed, and planning policies are already defined. The goal
of supply chain operations is to handle incoming customer
orders in the best possible manner. During this phase, firms
allocate inventory or production to individual orders, set a
date that an order is to be filled, generate pick lists at a
warehouse, allocate an order to a particular shipping mode
and shipment, set delivery schedules of trucks, and place
replenishment orders. Because operational decisions are
being made in the short term (minutes, hours, or days),
there is less uncertainty aboutdemand information. Given
the constraints established by the configuration and
planning policies, the goal during the operation phase is to
exploit the reduction of uncertainty and optimize
performance. The design, planning, and operation of a
supply chain have a strong impact on overall profitability
and success. It is fair to state that a large part of the success
of firms
like Wal-Mart and Dell can be attributed to their effective
supply chain design, planning, and operation. In later
chapters, we develop concepts and present methodologies
that can be used at each of the three decision phases
described earlier. Most of our discussion addresses the
supply chain design and planning phases.

PROCESS VIEWS OF A SUPPLY CHAIN
A supply chain is a sequence of processes and flows that
take place within and between different stages and combine
to fill a customer need for a product. There are two
different ways to view the processes performed in a supply
chain.
1. Cycle View: The processes in a supply chain are divided
into a series of cycles, each performed at the interface
between two successive stages of a supply chain.
2. Push/Pull View: The processes in a supply chain are
divided into two categories depending on whether they are
executed in response to a customer order or in anticipation
of customer orders. Pull processes are initiated by a
customer order, whereas push processes are initiated and
performed in anticipation of customer orders.

CYCLE VIEW OF SUPPLY CHAIN PROCESSES
Given the five stages of a supply chain shown in Figure 1-
2, all supply chain processes
can be broken down into the following four process cycles,
as shown in Figure 1-3:
Customer order cycle
Replenishment cycle
Manufacturing cycle
Procurement cycle
Each cycle occurs at the interface between two successive
stages of the supply chain. The five stages thus result in
four supply chain process cycles. Not every supply chain
will have all four cycles clearly separated. For example, a
grocery supply chain in which a retailer stocks finished-
goods inventories and places replenishment orders with a
distributor is likely to have all four cycles separated. Dell,
in contrast, sells
directly to customers, thus bypassing the retailer and
distributor. Each cycle consists of six subprocesses as
shown in Figure 1-4. Each cycle starts with the supplier
marketing the product to customers. A buyer then places an
order that is received by the supplier. The supplier supplies
the order, which is received by
the buyer. The buyer may return some of the product or
other recycled material to the supplier or a third party. The
cycle of activities then begins all over again.

Depending on the transaction in question, the subprocesses
in Figure 1-4 can be applied to the appropriate cycle. When
customers shop online at Amazon, they are part of the
customer order cycle-with the customer as the buyer and
Amazon as the supplier. In contrast, when Amazon orders
books from a distributor to replenish its inventory, it is part
of the replenishment cycle-with Amazon as the buyer and
the distributor as the supplier.
Within each cycle, the goal of the buyer is to ensure
product availability and to achieve economies of scale in
ordering. The supplier attempts to forecast customer orders
and reduce the cost of receiving the order. The supplier
then works to fill the order on time and improve efficiency
and accuracy of the order fulfillment process. The buyer
then works to reduce the cost of the receiving process.
Reverse flows are managed
to reduce cost and meet environmental objectives.
Even though each cycle has the same basic subprocesses,
there are a few important differences between cycles. In the
customer order cycle, demand is external to the supply
chain and thus uncertain. In all other cycles, order
placement is uncertain b ut can be projected based on
policies followed by the particular supply chain stage. For
example, in the procurement cycle, a tire supplier to an
automotive manufacturer can predict
tire demand precisely once the production schedule at the
manufacturer is known. The second difference across
cycles relates to the scale of an order. Whereas a customer
buys a single car, the dealer orders multiple cars at a time
from the manufacturer, and the manufacturer, in turn,
orders an even larger quantity of tires from the supplier. As
we move from the customer to the supplier, the number of
individual orders declines and the size of each order
increases. Thus, sharing of information and operating
policies across supply chain stages becomes more
important as we move farther from the end customer.
A cycle view of the supply chain is very useful when
considering operational decisions
because it clearly specifies the roles of each member of the
supply chain. The detailed process description of a supply
chain in the cycle view forces a supply chain designer to
consider the infrastructure required to support these
processes. The cycle view is useful, for example, when
setting up information systems to support supply chain
operations.